Debt-for-nature swaps: the state of play and scaling-up options

Abstract

This paper examines the evolution of debt swaps since its introduction in the 1980s. Sizeable debt swap transactions after 2020 and the need for urgent climate action in the face of elevated debt levels in many countries has increased the expectation that debt swaps could achieve climate and public finance objectives simultaneously. Our analysis shows that debt swaps remain a niche instrument and mostly consist of ad hoc transactions. Their uptake has typically been hindered by high transaction and monitoring costs. Where debt-for-nature swaps are feasible, they can increase fiscal space, but the set of circumstances where this outcome holds is limited and difficult to replicate. Improvements, however, can be made in terms of scaling-up and maximizing the impact of debt swaps. This requires a rethink of the current design and a shift towards a more coordinated approach. Increased coordination is also needed among all stakeholders, including debtors, creditors, non-governmental organizations (NGOs), international financial institutions (IFIs), and multilateral development banks (MDBs).